CAFTA (Central American Free Trade Agreement) will lead to free-trade between U.S. and Central America. Suppose there are two factors: skilled and unskilled labor and U.S. is skilled-labor abundant. There are two goods: apparel and computers, and apparel is unskilled-labor intensive.
a. State the relevant theorem and using it explain which good each country will export when trade commences after signing of CAFTA.
b. Which factor(s) will gain in absolute terms in the U.S. in the short run? Which factor(s) will gain in absolute terms in the Central America in the short run? Explain
c. Which factor(s) will gain in the U.S. in the long run in absolute and relative terms? Which factor(s) will gain in the Central America in the long run in absolute and relative terms? Explain.